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Jim Cramer: A Momentum Monsters Manifesto

Feb 26, 2014 | 11:30 AM EST

My philosophy, which is a little complex, endorses finding some of the momentum monsters of the market and making peace with them as a hedge against the performance and asset collection of these momentum-oriented managers. I have always thought, as someone who has been paid based on performance, that I had to hedge myself both against the downside of the stock market as well as the upside. That upside hedging often meant having some exposure to stocks that are momentum-driven, even if they are overvalued and riskier than I would like.

So what I have always attempted to do is to divine which stocks fit the patterns these money managers like, and then to exploit the process. It's the process by which these managers derive assets from their own generated performance, and then get more money in and put that money to work in these same stocks over and over again. As I explain in Get Rich Carefully, these managers are not sensitive to short-term valuations. They are sensitive to the big score, the out-years, when they hope these companies and their CEOs will successfully execute on their game plans.

I have always thought you need to hedge against that process, lest you fall behind these managers. These people have a virtuous circle going for them: They own high-growth stocks that go higher, which then bring in more money, and then they can send these same stocks even higher with their own buying. When you couple their buying with the possibility of a short squeeze that comes from hedge fund managers who bet against these companies -- and if they don't stumble -- well, let's just say you have some pretty powerful performers.

This is why, last week, I set out to identify which stocks really fit the Momentum Monsters pattern -- the stocks these momentum investors are using now as vehicles of performance. (See here, here and here.)

Now, notice I am never saying, not once, that this is my style of investing. I am simply saying that, just as you have to hedge against the downside with short positions or some cash, you have to hedge against the upside. You do this by picking a couple of these names, getting comfortable with them when they go down and then picking them up, in stages, into weakness that is not generated by issues in the companies themselves. So if the federal government shuts down, or if partisan politics causes debt-ceiling gridlock, or if Argentina or Turkey or Brazil or other emerging-market woes infect all stocks, you are ready to buy the momentum names that you can handle.

I am not endorsing the out-and-out chasing of the Momentum Monsters: Amazon(AMZN), Chipotle (CMG), Facebook(FB), Google(GOOG), Michael Kors (KORS), Netflix (NFLX), Priceline (PCLN), Regeneron (REGN), SolarCity (SCTY), Stratasys(SSYS), Tesla(TSLA), Twitter(TWTR), Under Armour(UA), Workday(WDAY) and Yelp(YELP). I am saying that you must find a couple of these that you like. Then, as they go down from a market-wide selloff, and not from some particular company-specific execution failure, you have to be ready to leg into them because of the way the business of money management works. You have to hedge, if you will, against these managers themselves.